The EU’s dilemma on granting Market Economy Status to China 

The World Trade Organization allows its Members to impose anti-dumping duties on imports from other Members in the case of dumping. Dumping takes place when an industry exports a product at a price lower than the price it normally charges on its own home market.

When China joined the WTO in 2001 it agreed in its Accession Protocol, specifically Section 15 of the Protocol, that other WTO Members would be allowed to treat Chinese imports differently, as China was designated as a Non-Market Economy. Instead of using Chinese domestic prices to establish whether dumping took place and to calculate the dumping margin, other Members were allowed to use prices in a third country market. This has led to higher anti-dumping duties on Chinese imports. China has always argued that Section 15 (a) and the possibility for Members to use alternative methodologies would expire after 15 years.

Consequently, in 2016 China expected that the EU and other WTO Members would have to recognise it as a Market Economy and revert to the normal methodology. European producers and organised labour vehemently oppose a change in  the EU’s anti-dumping methodology that will lead to an increase of cheap Chinese imports. The European Commission has now drafted a proposal changing the EU’s anti-dumping methodology. The proposal is meant to appease China by letting go of the Non-Market Economy designation while at the same time ensuring that anti-dumping duties will remain effective in dealing with imports from Chinese industries that operate in markets where significant distortions exist.

If Section 15 (a) has indeed expired then the EU’s current and proposed anti dumping regime will most likely not be in compliance with WTO law. The EU has therefore made a mistake in not taking a clear legal position on the effects of the expiry of Section 15(a),  making it vulnerable to a legal challenge against both its current and its proposed anti-dumping regime that China has already lodged at the WTO’s Dispute Settlement Body. Despite the fact that there are compelling legal arguments that call into question China’s interpretation of Section 15 (a)’s expiry, most prominently amongst which is the argument that only Section 15 (a)(ii) expires and that an alternative methodology can still be based on the remaining paragraphs of Section 15 (a).

The EU’s proposal has so far done little to satisfy China, as evidenced by their legal challenge. Therefore, a more robust legal position needs to be combined with political engagement between the EU and China. Cooperation based on reciprocity and mutual benefit is vital. The EU has plenty of bargaining chips to trade in negotiations with China without having to budge on the issue of its anti-dumping methodology. This EU-China rapprochement is all the more urgent now that the US is in the throes of a populistic backlash against the world trade system and mulling a return to protectionism. The EU and China should seize the initiative and show that cooperation on trade issues is still the only way forward.

 Master thesis by Olav de Wit
 Published on Law Blogs Maastricht